Marc Faber Is Predicting Another Crisis — Is He Right?

Famed investor Marc Faber — author of the Doom, Boom, and Gloom report — recently told CNBC that he believes that we could be setting up for a crisis that is bigger than the one that took place in 2008. The reason is that the economic recovery is largely a product of excessive government spending and an increase in indebtedness as opposed to an increase in the world’s productive capacity and an improvement in people’s living standards.

His observation is largely correct. Governments are becoming more indebted as they implement stimulus plans in order to improve the economy. While interest rates are low they can get away with doing this, but considering the debt loads governments such as the U.S. government are facing a higher interest rate environment would be disastrous.

Furthermore, he is right that the economic recovery is largely a façade. The stock market is climbing and the prices of high end real estate are rising as well, and so the rich are feeling better. But the “man on the street” isn’t feeling better. People are mostly getting lower paying jobs that aren’t very productive (e.g. working as a retail clerk) and yet their cost of living is rising.

Mr. Faber also told CNBC that cash is the most underappreciated asset in today’s market, and that he advises investors to hold some in lieu of stocks — which are pricing in an optimistic economic scenario — and bonds, which are simply overpriced given how low interest rates are.

Mr. Faber doesn’t tell his whole story in this interview. In an earlier, more extensive interview he gave to Eric King ofKing World Newshe says that he owns some gold — he always has some gold, and some of his income goes to gold, and he isn’t selling any gold. He also likes some stock markets and real estate markets in Southeast Asia. For example he mentioned that he owns Thai assets. While most investors cannot simply go out and buy Thai real estate the way Mr. Faber can, they can go out and buy shares in the iShares Thailand ETF (NYSEARCA:THD). This fund has risen about 6 percent this year, and it has outperformed the Dow Jones Industrial Average by about 10 percent since its inception in April 2008.

Regarding Mr. Faber’s call to hold cash I think this is always a good idea. Investors often get caught up in their own “great” investing ideas, and they look so much better than cash that they decide to ignore this asset. Cash is by now means a glamorous asset to hold, and given that banks are paying no interest and given that there is inflation cash loses value over time, and Mr. Faber admits this. But with stocks near all-time highs, and with investors eagerly borrowing money to buy stock it might be a good time to consider the opposing viewpoint. This is especially true considering the underperformance of high-risk assets such as growth stocks and small cap stocks.

But regardless of the validity of Mr. Faber’s views, one thing to note is that what he is saying has been true for many years. The United States has been over-indebted for decades, and so have the American people. Of course this state of affairs cannot continue indefinitely, but there is also no evidence that this state of affairs is coming to an end now.

Thus the best approach is to prepare some of your portfolio for the coming credit contraction and the inevitable debt issues that are facing the U.S. This means buy some gold and silver, and also hold some cash. But it also means that you can hold high quality stocks that trade at reasonable valuations, generate cash-flow, and pay dividends. You can always rebalance if you become concerned that the market currents will change.